Banking reform may be gaining ground

February 11, 2013 - Mike Maneval

Simon Johnson, former chief economist for the International Monetary Fund, suggests at the economix blog of the New York Times that a "growing number of influential voices" within the Republican Party and conservatism are contemplating measures to limit the size and scope of "too big to fail" banks, including such figures as George Will, Jon Huntsman and Peggy Noonan. An examination of the issue to which Johnson linked, by James Pethokoukis of the American Enterprise Institute, makes a compelling case that such banks incentivize recklessness when governments fear overall economic health depends on their stability, creating bailouts that subsidize failure.

A counterargument against limiting or curtailing such banks is made by a report by Hamilton Place Strategies, which argues that breaking up giant U.S. banks carries the risk of weakening American influence as foreign entities may strengthen in the shuffling and that US banks - even the too big to fail - already are smaller than foreign banking conglomerates. Pethokoukis is skeptical of comparing the U.S. banking climate with Europe's, and says the HPS report is dismissive of the role a myriad of government subsidies play in inflating the sizes of America's too-big-to-fail banks.

Johnson expresses tougher skepticism of the HPS report, arguing it largely ignores critical analysis of how the megabanks weaken monetary policy and relies on "vague assertions." Johnson also faults Hamilton Place Strategies for ignoring the role of government subsidies in the existing banking order. "Such subsidies encourage big banks to borrow more," to take more risk and to become even larger," Johnson writes. "The damage when such a bank fails is generally proportional to its size."

Greater accountability in the U.S. financial sector is necessary to replenish confidence and to prevent future spending of tax dollars to alleviate the failures of the well-connected. Hopefully, the advocates for such accountability, within and beyond conservatism, can continue to grow in number and influence. And the exchange between Hamilton Place Strategies and Johnson and Pethokoukis justifies hope these advocates have the acumen and dedication to articulating the case for important reform necessary to produce that growth.